Mantra of inclusive development

A country’s budget, in addition to estimating annual revenues and expenses, provides an opportunity to uplift the well-being of the people through fiscal management.

On June 11, the current government announced its fourth budget with a total outlay of Rs8.487 trillion and gross revenue receipts (tax and non-tax) of Rs7.909 trillion. The budget is presumed to be growth-oriented, with additional claims of ‘bottom-up’ approaches to poverty reduction and more inclusivity in the development process. Accordingly, a set of measures, including incentives to businesses, increase in the PSDP, social protection to marginalized groups, loan facilities to low-income households, support to SMEs etc is proposed in the budget. Despite these measures, success in terms of inclusive growth or development highly depends on how these plans are executed or how these incentives are reached to the downtrodden segment of society.

What does inclusive growth mean? The World Bank defines ‘inclusive growth’ as “the pace and pattern of economic growth, which are interlinked and assessed together”. Alternatively, inclusive growth comprises four components – pace of economic growth, poverty reduction, distributive justice or reducing inequalities, and productive employment. With regard to pace, economic growth in Pakistan has surpassed growth projections, with GDP growth of 3.96 percent in 2020-21 against a target of 2.1 percent, despite the retrogressive effects of Covid-19. This growth rate is even higher than the previous two years (2.08 and -0.47 percent in 2018-2019 and 2019-2020, respectively). Increase in remittances, and higher growth rates in large-scale manufacturing and wholesale and retail trade are the contributing factors in this regard.

This recovery is encouraging but it needs sustainability in two respects. First, it requires continuity for containing our fiscal and current account deficits which have been the regular features of our economy during the last two decades. Second, it should be self-sustaining, with raising investment and capital accumulation in the country. Given a growth target of 4.8 percent for 2021-22, with a claim to put the economy on path of a growth rate of 6-7 percent in the next two to three years, the government has made a 61 percent increase in the PSDP, allocating Rs900 billion for federal PSDP, and Rs1.235 for provincial PSDP.

The fiscal stimulus is worth appreciating, but it must contribute to the pace of growth by improving infrastructure and social sector development and creating an enabling environment for private-sector activities. Similar should be the effect of incentives to the private sector. For instance, around Rs119 billion of support to industries and individuals in terms of relief in Customs Duty (Rs42 billion), Sales Tax and Federal Excise Duty (Rs19 billion), Income Tax (Rs58 billion) would boost economic activities in the country. Likewise, Rs12 billion allocations to SMEs, reduction in capital gain tax on stocks from 15 percent to 12.5 percent, removal of withholding taxes on about eight types of services would further encourage private sector businesses in the country. In a nutshell, we have set the stage to enhance the pace of growth, provided that we have sufficient control over structural bottlenecks and institutional rigidities.

Amid the Covid-19 pandemic, poverty in Pakistan has been on the rise. According to recent estimates by the World Bank, based on lower-middle-income poverty rate ($3.2 per day), poverty in Pakistan stood at 39.3 percent in 2020-21. Likewise, it is 78.4 percent on the basis of the upper-middle-income poverty rate ($5.5 per day). Further, on the basis of the international poverty line of $1.90 PPP 2011 per day, the incidence of poverty has increased from 4.4 percent to 5.4 percent during the 2020-21, with more than two million people falling below this poverty line. All these estimates suggest a worsening situation of poverty in Pakistan.

With a view to reduce poverty or provide relief to low-income households, Rs260 billion has been allocated to the Ehsaas Programme, with a focus on 14 different categories including widows, orphans, poor, unemployed, needy students, and special citizens in society. In particular, 50 percent of this amount is proclaimed to be spent on women in order to enhance women empowerment in the country.

In addition to social safety nets, support to low-income households through Rs500,000 interest-free business loans, Rs200,000 interest free loans for tractors and machineries, and Rs2 million worth of low-interest loans for house building are expected to contribute to uplifting the welfare of low-income households. However, in the Pakistani context, reaching out to vulnerable or marginalized groups is not a simple task. Alternatively, the government has to work effectively on the design and target elements before final disbursement in order to avoid the inclusion and exclusion errors in this regard.

As far as distributive justice is concerned; Pakistan’s 2020 National Human Development Report (NHDR) shows that the income share of the richest quintile is 49.6 percent compared to only 7 percent of the lowest quintile. A further decomposition of income-based inequality shows that the income share of the poorest one percent is 0.15 percent compared to 9 percent of the richest 1 percent in 2018-2019. Likewise, the income of the richest 10 percent of Pakistan’s population is over 30 percent more than that of the total income of the poorest 40 percent of the population.

These statistics suggest that Pakistan would need to transfer 23 percent of the income of the richest two quintiles to the poorer three quintiles to ensure the equal distribution of income across all quintiles. In terms of the Human Development Index (HDI), the value of human development for the richest quintile is 0.698 compared to only 0.419 for the poorest quintile.

Amid such enormous inequality, Pakistan’s performance on the health and educational aspects of human development is miserable. For instance, the infant mortality rate in Pakistan is 55.7 per 1000 live births compared to an average of 26 for the rest of South Asia. Likewise, the under-five mortality rate is 67.2 per 1000 compared to around 32 for the rest of South Asia. Similar comparison prevails in terms of population growth rates, life expectancy at birth etc.

With regard to education, Pakistan’s adult literacy rate is only 60 percent, compared to an average of around 74 percent for the rest of South Asia, with women faring worse than their male counterparts. All these contribute to Pakistan’s low ranking on the HDI – 154th out of 189 countries, with HDI value of 0.557. Despite these statistics, we are cumulatively spending less than 5 percent of GDP on health and education. In the budget, combined allocations for health, higher education, and SDGs are Rs142 billion which roughly constitutes only 1.67 percent of the total budget. We have to enhance spending on these sectors in order to mitigate inequities or ensure distributive justice within the society.

Finally, productive employment is defined by the ILO as “employment yielding sufficient returns to labour to permit the worker and her/his dependents a level of consumption above the poverty line”. In other words, the deficit of productive employment takes two forms: the working poor and the unemployed. The unemployment rate is estimated at 8.83 percent for 2020-21, with the number of unemployed reaching 6.65 million, which, again, is aggravated by the Covid-19 pandemic. Likewise, according to the ILO, the average monthly earnings of employees in Pakistan are only Rs19,269 which is less than the minimum wage designated in Budget 2021-22. This is reflective of how Pakistan is facing a deficit of productive employment in addition to having issues like skills deficiency, bonded labour, child-labour, or security at work etc.

Focus on growth-oriented strategies, incentives to the industrial sector, CPEC-related projects, Special Economic Zones (SEZs) etc are expected to generate employment opportunities in the country. Likewise, focus on SMEs and loan facilities to low-income households would further enhance these opportunities. In addition, programmes like ‘Kamyab Jawaan’, ‘Hunarmand Programme’, ‘Youth Entrepreneurship Scheme’, ‘Start up Pakistan’ are good initiatives but there are no explicit allocations in the budget for these schemes.

The writer is associate professor at the Pakistan Institute of Development Economics (PIDE), Islamabad.